Chapter III – Income

I. Income in General;

a. Definition of “Income” (look under www.wikipedia.org);

 money received, especially on a regular basis, for work or through investments.

b. Haig-Simmons definition of “Income” (look under www.wikipedia.org);

 is an income measure used by public finance economists to analyze economic well-
being which defines income as consumption plus change in net worth.

II. Taxable Income;

a. S31;
SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items
of gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special laws.

b. Sec 36 – 38, Regulations No. 2;

SEC. 36. Items not Deductible. -

(A) General Rule. - In computing net income, no deduction shall in any case be allowed in
respect to -

(1) Personal, living or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;

This Subsection shall not apply to intangible drilling and development costs incurred
in petroleum operations which are deductible under Subsection (G) (1) of Section 34
of this Code.

(3) Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made; or

(4) Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.

(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions
shall in any case be allowed in respect of losses from sales or exchanges of property directly
or indirectly -

(1) Between members of a family. For purposes of this paragraph, the family of an
individual shall include only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants; or

(2) Except in the case of distributions in liquidation, between an individual and

corporation more than fifty percent (50%) in value of the outstanding stock of which
is owned, directly or indirectly, by or for such individual; or
 (3) Except in the case of distributions in liquidation, between two corporations more
than fifty percent (50%) in value of the outstanding stock of which is owned, directly
or indirectly, by or for the same individual if either one of such corporations, with
respect to the taxable year of the corporation preceding the date of the sale of
exchange was under the law applicable to such taxable year, a personal holding
company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another
trust if the same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and beneficiary of such trust.

SEC. 37. Special Provisions Regarding Income and Deductions of Insurance

Companies, Whether Domestic or Foreign. -

(A) Special Deduction Allowed to Insurance Companies. - In the case of insurance companies,
whether domestic or foreign doing business in the Philippines, the net additions, if any,
required by law to be made within the year to reserve funds and the sums other than dividends
paid within the year on policy and annuity contracts may be deducted from their gross income:
Provided, however, That the released reserve be treated as income for the year of release.

(B) Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability
and mutual workmen's compensation and mutual casualty insurance companies requiring
their members to make premium deposits to provide for losses and expenses, said companies
shall not return as income any portion of the premium deposits returned to their policyholders,
but shall return as taxable income all income received by them from all other sources plus
such portion of the premium deposits as are retained by the companies for purposes other
than the payment of losses and expenses and reinsurance reserves.

(C) Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include
in their return of gross income, gross premiums collected and received by them less amounts
paid to policyholders on account of premiums previously paid by them and interest paid upon
those amounts between the ascertainment and payment thereof.

(D) Assessment Insurance Companies. - Assessment insurance companies, whether domestic

or foreign, may deduct from their gross income the actual deposit of sums with the officers
of the Government of the Philippines pursuant to law, as additions to guarantee or reserve
funds.

SEC. 38. Losses from Wash Sales of Stock or Securities. -

(A) In the case of any loss claimed to have been sustained from any sale or other disposition
of shares of stock or securities where it appears that within a period beginning thirty (30)
days before the date of such sale or disposition and ending thirty (30) days after such date,
the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain
or loss was recognized by law), or has entered into a contact or option so to acquire,
substantially identical stock or securities, then no deduction for the loss shall be allowed under
Section 34 unless the claim is made by a dealer in stock or securities and with respect to a
transaction made in the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by the contract or option to
acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the
particular shares of stock or securities, the loss from the sale or other disposition of which is
not deductible, shall be determined under rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the Commissioner.

(C) If the amount of stock or securities acquired (or covered by the contract or option to
acquire which) is not less than the amount of stock or securities sold or otherwise disposed
of, then the particular shares of stock or securities, the acquisition of which (or the contract
or option to acquire which) resulted in the non-deductibility of the loss shall be determined
under rules and regulations prescribed by the Secretary of Finance, upon recommendation of
the Commissioner.

c. Difference between Capital & Income;

The essential difference between capital and income is that capital is a fund; income is a flow.
A fund of property existing at an instant of time is called capital. A flow of services rendered
by that capital by the payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time is called income. Capital is wealth,
while income is the service of wealth. (Madrigal vs. Rafferty, 38 Phil 14)

i. Madrigal v. Rafferty 38 Phil 14;

The essential difference between capital and income is that capital is a fund; income is a flow.
A fund of property existing at an instant of time is called capital. A flow of services rendered
by that capital by the payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time is called income. Capital is wealth,
while income is the service of wealth.

FACTS: Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914.
The marriage was contracted under the provisions of law concerning conjugal partnership

On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73

Vicente Madrigal was contending that the said declared income does not represent his income
for the year 1914 as it was the income of his conjugal partnership with Paterno. He said that
in computing for his additional income tax, the amount declared should be divided by 2.

The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the United
States Commissioner of Internal Revenue decided against the claim of Madrigal.
Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged
to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: W/N the income reported by Madrigal on 1915 should be divided into 2 in computing
for the additional income tax?

HELD:
No, The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon
income and not upon capital and property

The essential difference between capital and income is that capital is a fund; income is a flow.
A fund of property existing at an instant of time is called capital. A flow of services rendered
by that capital by the payment of money from it or any other benefit rendered by a fund of
capital in relation to such fund through a period of time is called income. Capital is wealth,
while income is the service of wealth.

As Paterno has no estate and income, actually and legally vested in her and entirely distinct
from her husband’s property, the income cannot properly be considered the separate income
of the wife for the purposes of the additional tax.

To recapitulate, Vicente wants to half his declared income in computing for his tax since he is
arguing that he has a conjugal partnership with his wife. However, the court ruled that the
one that should be taxed is the income which is the flow of the capital, thus it should not be
divided into 2.

d. Requisites for Income to be Taxable;

Income, Requisites for Taxable Income,

Income Defined - gained derived from labor, capital, or both including the profit derived from
the sale or exchange of capital asset.

Income distinguished from

1. Revenue- this term includes all funds or income derived by the government from taxes and
other sources. Income is to private entities as revenue is to government.
2. Capital- Income refers to the flow of wealth during a definite period of time, while capital
is the fund or a property existing at one distinct point of time.
3. Receipts- consist of capital and income and therefore is broader in scope that income.

Tax Base- a taxpayer’s taxable income for the taxable year.

Taxable Income- the amount of income upon which the tax rate prescribed by law is applied
to get the income tax due, depending on the kind of taxpayer.
- Means the pertinent items of gross income specified in the NIRC, less the deductions and/
or personal and additional exemptions if any authorized for such types of income by the NIRC.

Net income must be computed with respect to a fixed period, which for individual taxpayers
is a calendar year or a period of 12 consecutive months ending December 31 of every year.
Corporations however, may file their income tax returns on a fiscal year basis, or for a period
of 12 consecutive months ending on the last day of any month other than December.

Requisites for income to be taxable

1. there must be gain or profit
2. the gain must be received or realized
3. the gain must not be excluded by law or treaty from taxation. Income need not be in cash,
it is sufficient that it may be appraised in terms of money.

i. CIR vs. Agrinurture Inc. CTA EB Case # 1054;

e. Test in determining income / Doctrines on Determination of Taxable income;

i. Realization Test;
 no taxable income until there is a separation from capital of something of exchangeable
value (money), thereby supplying the realization or transmutation which would result
in the receipt of income.

1. Eisner v. Macomber 252 US 89

2. Raytheon Production Corp vs. CIR 144 F2d 110
3. BIR Ruling 091-99 dated July 8, 1999
ii. Claim of right doctrine
1. Claim of Right Doctrine, Wikipedia.org
2. Commissioner v. Tours Specialist 183 SCRA 402
3. Commissioner vs. Javier 199 SCRA 824
iii. Income from whatever source
1. Sec 50 Regulations No. 2
2. Guitterez vs. Collector 101 Phil 713
3. Commissioner v. Glenshaw Glass 348 US 426
4. Farmers & Merchants Bank v. CIR 59 F2nd 912

iv. Economic benefit test

1. BIR Ruling No. 123-97 dated November 10, 1997
2. BIR Ruling No. 029-98 dated March 19, 1998
3. United States vs. Kirby Lumber Co.
4. Bradford vs. CIR 233 F2d 935

III. Gross Income

a. General Definition S32(A)
i. Compensation
1. S32(A)(1)
2. Sec 2.78.1 (A) RR 2-98 as amended by RR 11-18
3. Old Colony Trust Co. v. Commissioner 279 US 716
4. RR 10-2008
5. Fringe Benefits
a. S33
b. RR 3-98
c. Benaglia, Arthur 36 B.T.A 838
d. Collector v. Henderson 1 SCRA 649
e. CIR vs. Efren P. Castaneda GR 96016 Oct 17, 1991 203 SCRA 72
ii. Income from business or exercise of profession
1. Secs. 43 – 47, Regulations No. 2
iii. Rents
iv. Gains derived from dealings in property
1. Ordinary Gains & Losses
a. Ordinary Income S22(Z)
b. Ordinary Loss S22(Z)
2. Capital Gains & Losses
- Capital gains on Stocks
- Capital gains on Real Property
- Capital gains on other Capital Assets
b. Capital Assets S39(A)(1)
c. Net Capital Gain S39(A)(2)
d. Net Capital Loss S39(A)(3)
e. Holding Period S39(B)
f. Limitation on Capital Losses S39(C)
g. Net Capital Loss Carry Over S39(D)
3. Real Property: Ordinary vs. Capital Assets
a. RR 7-2003
4. Recognition of Gains & Losses
a. S40
b. RR 18-2001

v. Interest
vi. Royalties
vii. Dividends
1. S73
2. CIR v. CA, CTA, & ANSCOR GR 108576 Jan 30, 1999
3. Eisner v. Macomber 252 US 89
viii. Annuities
ix. Prizes and winnings
x. Pensions
xi. Partner’s distributive share in a general professional partnership
1. S26
xii. Income from whatever sources

IV. Exclusions from Gross Income

1. S32(B)
2. Sec 2.78.1 (B) RR 2-98, RR 5-2011, RR 8-2012
3. De minimis benefits
4. CIR v. CA & Castaneda GR 96016 Oct 17, 1991 203 SCRA 72
5. BIR Ruling 219-93 dated May 17, 1993

V. Income from Sources within and without the Philippines S42

a. Income from sources within the Philippines S42(A), (B)
b. Income from sources without the Philippines S42(C), (D)
c. Income from sources partly within and without the Philippines S42(E)